• Wednesday, Nov 30, 2022
  • Last Update : 10:24 am

Something for everyone leads to large deficit

  • Published at 05:56 pm June 3rd, 2021
Finance Minister AHM Mustafa Kamal presents the proposed national budget for 2021-22
Finance Minister AHM Mustafa Kamal presents the proposed national budget for 2021-22 fiscal year in parliament on Thursday, June 3, 2021 Focus Bangla

All these measures clearly demonstrate the government’s intention to win over people’s hearts through a populist budget during the trying times of a prolonged pandemic

In its proposed national budget for the financial year 2021-22, the government has put in all efforts to please a broad spectrum of people with tax cuts for businesses, a widened social safety net and consciously modest target for the revenue officials.

All these measures clearly demonstrate the government’s intention to win over people’s hearts through a populist budget during the trying times of a prolonged pandemic. But, in the process, the government also took upon itself the burden of financing a huge 35.5% deficit in the Tk603,681 crore budget.

The government has to fund over a third of its outlay from foreign and domestic loans and foreign grants. Finance Minister AHM Mustafa Kamal told the parliament yesterday that he would be looking to make up at least a third of the Tk214,681 crore deficit with bank loans. 

It is apparent from the proposed budget philosophy – saving lives and livelihoods – that the government is determined to support businesses and marginalized communities during the protracted Covid-19 pandemic.

Also Read- Budget FY22: Health allocation lacks vision, experts say

But critics say deficit financing might prove to be taxing too and bring these measures to nought. The large volume of bank loans might deprive the private sector of much-required investment and liquidity in the market that would be required for a quick recovery.

The finance minister, who presented the third budget of the Awami League government’s current tenure, decided not to increase the National Board of Revenue’s (NBR) tax revenue target, which remained at Tk330,000 – same as the current year. However, the non-tax revenue target was proposed at Tk43,000 crore, substantially higher than the outgoing fiscal’s Tk33,000 crore.

Recognizing the government’s limitation in revenue generation, the minister acknowledged that although a large section of the population can afford to pay taxes, they don’t, which is why the number of taxpayers is currently a little over 2.5 million in a country of 170 million people.

“Hence, emphasis will be given in the next budget to bring them under the tax net by taking necessary steps to prevent tax evasion. Moreover, our Tax-GDP ratio is low compared to that in other similar economies. Measures will, therefore, be taken to increase the Tax-GDP ratio at a reasonable level,” asserted Kamal.

Also Read- Budget widens social safety net to alleviate pandemic woes

While deficit financing will clearly test and strain the government’s fiscal management, its proposals to expand the safety net for the poor and the vulnerable, tax reduction for businesses, substantial allocation for the mega projects and a Tk10,000 crore special fund for Covid-19 emergency will go down well as far as public satisfaction is concerned.

Although a much-debated feature, and despite indications of the finance minister that money whitening facilities would continue, he refrained from mentioning any such measure while proposing the budget for the next fiscal. Given the omission to categorically announce the discontinuation of the facility, some quarters have already greeted it with “cautious” commendation.

Tax cut proposals

Intent on growing the economy following more than a year of reduced economic activity due to the pandemic, the finance minister proposed several tax reduction measures. Companies not listed in the stock market will see their tax reduced to 30% from 32.5%.

The tax rates for companies listed in the stock market and banks, insurance companies and financial institutions have gradually been reduced from 27.5% and 42.5% to 25% and 37.5% respectively between FY2009-2010 and FY2020-2021.

The finance minister said the continuation of this policy had relieved taxpayers of a huge burden and also generated investment and created employment opportunities in the country. And, yesterday, he proposed a further cut in tax for publicly traded companies from 25% to 22.5%.

The biggest reduction in tax was for individual proprietorships which went from 32.5% to just 25%.  

Also Read- Experts for proper planning as education budget up

The businessman-turned-finance minister said the present ratio of private investment to GDP stands at 23%. “The government has taken initiatives to improve this ratio. Reduction in corporate tax rate is expected to facilitate achieving the target for private investment to GDP ratio.”

In line with the ongoing global trend and in light of the ongoing pandemic, the minister reasoned that revisiting the existing tax rate was much needed.

Kamal said he hoped that a competitive tax rate coupled with the prevailing business-friendly environment will make a significant contribution towards the expansion of trade and commerce and industrialization. Consequently, he proposed a corporate tax rate reduced to 32.5% from 35%.

“I propose to further reduce the tax rate for companies not listed in the stock exchange to 30% from 32.5%, and the tax rate for listed companies to 22.5% from 25% for FY2021-2022.”

Expansion of safety net coverage

The present government has been consistently increasing social safety net allocation to improve the condition of the poor. In FY2008-2009, the allocation for the social safety net was Tk13,845 crore, which has increased almost seven-fold to Tk95,574 crore in the current fiscal year.

Also Read- Budget FY22: Education might get costlier at private institutions

Now, the finance minister proposed an allocation of Tk107,614 crore for social safety net programs (SSNP), which is 17.83% of the budget. This increase appears significant and much needed in the context of a higher poverty incidence owing to pandemic-induced economic hardship. Although the government reaches up to 25 million poor with its numerous assistance programs, studies in recent months showing millions more relegated to poverty obvious call for more aid at the grassroots and margins.

However, the government’s failure to properly list beneficiaries, stop leakage and prevent duplication of safety net program came up prominently in discussions pointing out that the government remained content with giving the aid to 3.5 million only because of mismanagement in beneficiary-listing.  

Other areas of focus

Like previous years, the government made modest increases to the health sector, understandably so for a pandemic year. However, when considered on a fiscal-on-fiscal basis, the proposed increase is not that significant and perhaps only to be able to claim having increased the health budget.

Experts, however, give more emphasis on the utilization of the budget and Annual Development Programs (ADP) in the health sector rather than keeping some special fund allocations. ADP implementation in the health sector has been lacklustre in the outgoing financial year.

Aslo Read- Budget FY22: 10-year tax exemption for agro industries, entrepreneurs

In FY2021-22, the government also put in a major thrust on roads and infrastructure, education, energy, and speedy completion of the mega projects, in particular.

To increase investment and generate employment, the finance minister said, steps have been taken to establish 100 Economic Zones across the country, which will provide employment opportunities for an estimated 10 million people.

“Approval has already been issued for the establishment of 97 Economic Zones. Production has already been begun in 9 Economic Zones and the development work in 28 Economic Zones is in progress, which has provided employment opportunities for around 40,000 employment seekers,” he said.

In addition, employment opportunities for another 800,000 people will be created. To date, investment proposals worth $27.07 billion from 210 investors have been received at these economic zones, said the minister.

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